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It is an SKSE plugin that applies the existing Havok physics engine to other uses in skyrim. Swishing hair, flowing skirts, or the ever popular bouncing boobs.

When Skyrim was originally released, the extent of the use of the Havok physics engine was restricted to things bouncing around; whether dead bodies, the odd skull, or a room full of weapons. If you wanted a cape that flowed when you ran, it would have been an animation that detailed the movement. While this simulates realism, it isn't realism.

HDT Physics Extension alleviates the problems associated with animation by actually using the physics engine that is part of the retail game. Through some creative use of SKSE, HydrogensaysHDT (the author of the Physics Extension plugin) has provided a set of tools that create game physics objects that interact and respond to the world around them. A ponytail can bounce off a womans back, a cape can flow in any direction and boobs can bounce around and react to touch.